Weekend Reading for Financial Planners (Nov 29-30)

Executive Summary

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with an announcement that the CFP Board and Rick Kahler have reached a resolution regarding his publicly controversial “fee-only” situation, with the odd conclusion that Kahler can avoid declaring that he receives any commission compensation directly or through a related party by transferring his commission-based business to… his wife, who inexplicably is not being treated as a related party. Also in the news this week was an updated regulatory notice associated with the Department of Labor’s fiduciary proposal, suggesting that the next draft is still on track for release in January.

From there, we have a number of practice management this week, including a discussion of how advisors might plan to adapt (in advance) to survive the next big market downturn, a look at how advisors can create a “shock plan” to plan in advance for potential shocks to the business, a guide for advisors looking to change broker-dealers about how to do it properly to maximize the retention of clients and minimize business disruptions (to the extent possible), and an interesting profile of an independent RIA Wetherby Asset Management that has grown to over $4B of AUM in just over 20 years with a whopping $10M client minimum yet even while nearly 75% of its staff are under the age of 40.

We also have a couple of technology articles this week, including a review of the new financial planning software Advizr, a look at some advisor technology tools being adopted on mobile devices, and a (favorable) early look at the major client portal overhaul coming for the Black Diamond portfolio performance reporting software.

We wrap up with three interesting articles: the first is a detailed look from the RIA’s perspective at the recent Barrons cover story on Schwab CEO Walt Bettinger that suggests the company is still conflicted about the fact that it is simultaneously the largest independent RIA custodian and also a massive consumer retail brand; the second looks at client trust, and makes the interesting point that just because clients do business with an advisor doesn’t mean they fully trust the advisor (which may explain why the clients still have other outside advisors, and are not referring despite saying they are “happy” clients); and the last explores how the amount of available alpha in the investment markets may be shrinking, despite the fact that active managers have more tools and resources that ever at their disposal, because paradoxically the higher the average skill level of all active managers, the harder it is for any one of them to materially outperform.

How to Survive Big Market Shifts (Bob Veres, Financial Planning) – At the Insider’s Forum conference this fall, Bob Veres conducted an audience-wide scenario-learning exercise of how advisors might handle some “unexpected” disruptions to their business, looking at three possible scenarios: 1) that we’re actually still in the early stages of a bull market that could rage on for many more years as the positive impact of recent technology breakthroughs accelerate; 2) that the markets will crash and burn with a disruptive market event (the Fed overreacts to an initial whiff of inflation, the Chinese economy crashes as its leaders rein in the shadow banking system, etc.); or 3) markets muddle sideways with fairly flat returns across most asset classes, not triggering a crash, but resulting in a dramatic underperformance relative to client financial goals and potentially shattering a lot of retirement models. Given the unequal nature of the potential scenarios – e.g., the crash-and-burn scenario might be least likely, but also the most damaging if it occurs – the conversation focused primarily on how to dampen the potential impact of a catastrophe. Considerations included: 1) adjusting fee models (the AUM model will continue to be strong in the bull market scenario, but in the others, adopting a retainer model may be more stable); 2) focusing more than ever on planning services to supplement investment advice, not only to help retain clients in a bear market, but also if the bull market scenario emerges and clients potentially begin to chase returns; 3) manage exposure to fixed costs, which may include everything from outsourcing and adding technology, to restructuring staff compensation with a lower fixed base salary and a higher component of incentives/bonuses (that don’t have to be paid if the firm’s revenue is down in a bear market); and 4) that rising compliance costs may present a challenge in all of the scenarios, and could lead to continued consolidation as advisory firms seek to merge to create compliance scale.

Big 3 Business Catastrophes: How To Cope With A Shock To The System (Joe Duran, Investment News) – As a business owner, scary surprises and shocks can happen, and almost by definition they are not something we’re fully prepared for and certainly don’t occur at a convenient time. This can be especially problematic for entrepreneurial business owners, who generally have some healthy optimism (or they probably wouldn’t have started a business in the first place!), but that optimism can lead them to be especially blindsided by unexpected problems. To address this, Duran suggests that firms should create a “shock plan” – a simple one-page summary of the steps to be taken should a major (financial) shock occur, which most often are the result of one of three surprises: a sharp and unexpected decline in revenue/cash flow; the loss of a key employee; or a client crisis. To handle the first, Duran suggests that firms should consider, in advance, what changes could be made if necessary to deal with a sharp decline in cash flow – would it be compensation adjustments, downsizing staff, spending freezes, or something else, would it kick in at a 10% revenue decline, or 25%, or 50%? In terms of a key employee loss – which remember, can happen because the employee decides to leave for a competitor (or open up shop to become one), or simply due to a health-event event (death or disability) – the plan might include additional client retention efforts that could be engaged, like a temporary cut in client fees, raises and promotions to other staff to step into the void, or even giving clients some form of satisfaction money-back guarantee. In the context of a client crisis, Duran notes that for advisors being so reputation- and personality-based, that a reputational attack (e.g., in the press or via social media) is a threat that should be part of the shock plan, and there should be a plan for what the response will be in the event of a reputational crisis (if the allegation is true, accept blame, overcompensation for the mistake, and overcommunicate the response; if it’s false, respond aggressively if it truly threatens the firm, but otherwise laugh it off in recognition that success brings attacks). Of course, in the end a shock event can’t be perfectly planned for – and at best, a one-page shock plan will still only be a blunt generalized approach for a particular problem that might arise in the future; nonetheless, having a starting point to adapt from is a lot better than trying to respond in the midst of a crisis when emotions are running high.

How To Quit [Your Broker Dealer] The Right Way (Rick Rummage, On Wall Street) – Changing broker-dealers and leaving a current firm can be a high-stakes proposition for an experienced advisor, and broker-dealers concerned about losing an advisor (and their clients) can potentially make a transition very unpleasant for the advisor, including terminating the advisor (since most advisors are “employees at will”) before there is even a chance to resign (which can lead to negative language on the U-5, that in turn may cause the new broker-dealer to balk at taking on the advisor or change the offer). As a result, Rummage suggests first and foremost that if the advisor is considering a change, tell no one outside of a spouse or business coach/consultant (remember, even friends may inadvertently spread gossip that makes the firm take preemptive action). When it comes time to resign, do so on the day you actually intend to resign with a short and direct letter, as anything said in the letter can be used against the advisor in litigation, and as soon as the resignation occurs the advisor will almost always be escorted to the door immediately to cut off access to client information (which means it’s a very bad idea to give two weeks’ notice, or the day you give notice may unwittingly become your last day!). Accordingly, it is also customary to resign on a Friday afternoon, giving the advisor just enough time to go immediately to the hiring firm that afternoon, complete the paperwork for the transition, and then spend all weekend (Friday night, all of Saturday, all of Sunday) contacting clients (by resigning on a Friday afternoon, the departing firm may not have firm to reassign clients to new advisors, giving you a head start in retaining those clients through the transition). If the departing firm makes a counter-offer, it should almost always be declined, as the act of announcing a departure – even if altered by a counteroffer – often poisons the relationship well with management anyway. If there is a non-solicit in place (as is often the case), be certain to consult with a securities attorney about exactly what can, and cannot, be communicated to clients, and how it is (or isn’t) appropriate to try to contact them. And in the end, remember that while there may be urgency as the advisor making the transition, clients will not necessarily have the same sense of urgency, and pushing them can damage the relationship – so recognize that for at least some clients, the transition will take come, and that means there may be some ongoing competition for their attention from the prior firm as a new advisor is eventually assigned.

A Firm In Sync (Jerilyn Klein Bier, Financial Advisor) – This article is a profile of Deb Wetherby, and her firm Wetherby Asset Management, which after 24 years has grown to a whopping $4B of AUM with 500 clients nationwide, and is one of the largest employee-owned advisory firms in the country. While the firm has had a spectacular growth curve, Wetherby notes that growth was never itself a top priority; instead, the firm annually updates with all firm shareholders its business plan, which in turn focuses around the firm’s “five pillars” of superior client service, superb investment execution (the firm uses a combination of an internal research team and external relationships), operational excellence, developing human capital, and overall business health and growth. The focus on human capital, in particular, has led the firm to invest heavily in (younger) staff; there are a total of 56 employees, 15 shareholders (most of whom are employees, as Wetherby advocates for sharing ownership so employees will act like owners), and a whopping 41 of the employees are under the age of 40. Wetherby focuses heavily on team-building as well, and client service is structured in teams that include wealth managers, investment associates, and operations associates. As the firm has grown, it has raised its minimums over time as well, and what started out as a $100,000 minimum at the outset is now $10M, and most new clients are referred from either existing clients, or their accountants and attorneys. The firm also does a lot of work with impact investing, and while less than 4% of the firm’s total AUM is allocated to impact investments, about 1/3rd of new business inquiries tie to the firm’s recognized expertise in impact investing and sustainability.

Tech Review: Advizr’s New Planning Tool (Joel Bruckenstein, Financial Planning) – While the landscape of financial planning software is dominated by a few large companies, Bruckenstein reviews a newcomer called Advizr, that aims to simplify the financial planning process to make delivering planning more accessible to a wide range of financial services professionals. The software interface is clean and modern, with an advisor dashboard that focuses heavily on business growth opportunities (including potential investment/rollover and insurance opportunities). Planning data can be entered either by the advisor, or by generating an email invitation to the client, who can enter their own data through the link provided. Once initial client data is entered through the guided input screens, advisors can select client goals and input the associated details (retirement, college education, etc.), and the tool allows data to be pulled in via account aggregation as well. Current spending details can either be estimated at a high level, or entered in detail, and remaining free cash flow can then be allocated towards goals, with a “calibrate” section that can be used interactively with the client to understand the impact on goals as cash flow is assigned to one goal or another (though notably, the software overall is not “cash-flow” based but is more goals-oriented). Overall, Bruckenstein states that there is much to like about Advizr’s clean and intuitive interface, and pricing is anticipated to be “highly competitive”. However, Bruckenstein also notes that the planning process is heavily automated and guided, which may be a plus for “simple” goals-based plans but a barrier for advisors who do more complex planning and/or clients who have more complex needs and cannot fit the software to the exact details of the situation; as a result, the software’s compelling user experience is probably more approach for those who want to produce basic plans for mass-market clients, but not comprehensive planners who service higher-net-worth clientele.

Going Mobile (David Lawrence, Financial Advisor) – As advisors have increasingly adopted mobile devices, including smartphones and tablets, advisor technology companies have introduced mobile versions of their software, but Lawrence notes that often the mobile solutions are just not as capable as their desktop counterparts. Nonetheless, there are a number of software options that can help advisors improve productivity on the road with clients. For instance, LaserApp Anywhere allows investment account paperwork to be prefilled with client information, electronically signed, and securely transmitted, allowing a client to get everything done on the spot, without any paper, via a mobile device. A number of popular advisor CRM tools also have mobile versions now, including Redtail, Grendel, and Advisor’s Assistant (although the exact capabilities of the mobile tools vary compared to the desktop browser versions). Beyond just using a mobile device to handle CRM information and paperwork, Lawrence also notes that mobile devices can be used to dictate notes that are directly deposited into CRM software using tools like Copytalk. The caveat to all the mobile technology, though, is that access to such information – especially client-related data – means advisors should also be doing due diligence with their software vendors about data security.

A Major Overhaul (Joel Bruckenstein, Financial Advisor) – Portfolio performance reporting software Black Diamond will soon be making a major overhaul to its “Blue Sky” platform, the first significant upgrade since it was acquired by Advent Software back in 2011, and will include improvements and “renovations” to both the advisor-facing portion of the platform, and its client-facing portal. The latter (client-facing portal) will come first, and is the focus of Bruckenstein’s review. The new client portal is anticipated around the turn of the new year, which Bruckenstein lauds as the right choice given that many advisors have struggled with client adoption of the portal. Low adoption has often been blamed on clients being too old or not tech savvy, but Bruckenstein notes it just be because the client portal was not actually that good (given that consumer-facing sites like Mint.com and robo-advisor platforms seem to be enjoying far more adoption, thanks to a better user experience). The new version will include a refresh of the portal itself with a mobile-first responsive design (which Bruckenstein found to be highly satisfactory in his testing), as well as more customizable features (e.g., the ability to adapt different portals for A, B, and C clients who may have different needs) through a system of “cards” that can be created and adapted for clients, and the portal will also be going beyond just performance reporting (e.g., to include vault features). The client portal also has the ability for the advisor to push notifications, either broadly to all clients, or selectively (e.g., send this to every client that has Schwab accounts, or more than $3M of AUM, or holds a certain position).

What A Close Reading Of Barron’s Cover Story On Walt Bettinger Reveals (Sanders Wommack, RIABiz) – While Chuck Schwab himself is still the chairman, founder, and major shareholder of the Charles Schwab enterprise, Walter Bettinger is the company’s CEO, and a recent cover story from Barron’s has provided a unique glimpse into Bettinger and the potential future direction of the Schwab organization, as it simultaneously runs the largest institutional RIA platform for advisors, but has also been evolving itself into a giant “full service” advisory firm (with the combined platforms doubling Schwab’s AUM in the past 6 years to a whopping $2.4 trillion). Bettinger himself has an interesting background – he was the youngest of four children brought up in a small Ohio farm town, and at age 22 (in the 1980s) he launched his own pension service and advice company, building it with cold-calling potential clients all day while he went to night school to become an actuary and then later using his actuary credentials to give free investment seminars to accountants and lawyers to generate referrals. As the CEO of Schwab, Bettinger professes a passion for helping everyday consumers invest better and more cheaply, and suggests that helping the industry evolve away from the older, traditional Wall Street models has been his life’s work since he started his first company. Bettinger actually found his way to Schwab when his pension consulting firm started using Schwab as a record-keeper for its 401(k) business; Schwab bought the company shortly thereafter, and Bettinger was plucked out of that division 9 years later (in 2004) to become the head of Schwab’s retail unit, and later its CEO in 2008. Notably, though, the article is not a pure fluff piece; Wommack points out that for a CEO profile, there is a surprising lack of testimonials from others about Bettinger’s leadership and management ability (beyond positive comments from Chuck Schwab himself, which are still somewhat “restrained”). In addition, while Schwab’s assets have doubled in 6 years, so has the overall market, and in fact Schwab’s market share of RIAs has been fairly flat (at 26% now, and 25% back in 2010), and its share price has significantly underperformed both the S&P 500 and rivals like TD Ameritrade. The Schwab article also quotes an independent RIA that has been shifting new clients to Pershing Advisor Solutions, after losing a client to the Schwab retail unit that was offering $2,500 to high-net-worth clients who opened up a large account (the offer did not apply to accounts managed by independent advisors), and raises the broader question of whether Schwab can continue to serve both RIAs and consumers simultaneously, especially given that Schwab’s Private Client unit itself has about $60B of AUM and would be one of the largest RIAs in its own right.

Two Bridges (Bill Bachrach, Financial Advisor) – Just because a client likes and trusts you enough to do some business with you doesn’t mean you’ve truly crossed the trust bridge with the client; instead, Bachrach suggests that the first trust bridge hasn’t really been crossed until a client is willing to give the advisor all of the business (and that clients who keep money with multiple advisors are simply signalling that they don’t fully trust any of those advisors). Even once that first trust bridge has been truly crossed, though, Bachrach suggests that just because the client will give you all of their business, still doesn’t mean the client is trusting enough to refer you to their friends, family, and colleagues – the level of trust for referrals must be even higher, as the client implicitly risks their own relationships by referring you. Given these dynamics, and the fact that most advisors don’t really have all their clients doing all their business with the advisor (and/or aren’t really referring the advisor that much), Bachrach suggests that advisors still need to be investing more into continuously building trust with clients and enhancing your client value. The caveat, of course, is that it can be hard to determine what clients truly want and need to enhance value in the first place; Henry Ford was famous for saying “If I asked people what they wanted, they would have said faster horses,” and Steve Jobs was known to not rely on market research, suggesting that “people don’t know what they want until you show it to them.” Bachrach gives a number of suggestions about how to enhance client service, give clients a better experience, connect with them more deeply, and engage them more, to try to improve the trust relationship. The bottom line, though, is simply this – while clients doing some business with you means they have at least some trust with you, if clients aren’t doing all their business with you and still have other/outside advisors, and aren’t referring very much (or at all), recognize that it is likely because there’s still more work to be done in building trust.

Why Alpha’s Getting More Elusive (Larry Swedroe, ETF.com) – In this article, Swedroe highlights the paradox of skill that is driving down the available alpha in the marketplace, with an interesting baseball analogy. The “modern era” of baseball began in 1903, and in the subsequent 38 years, seven different players hit at least .400 (with a few players doing it more than once), with the latest being Ted William who batted .406 in 1941. Yet in the 70 years since, not a single player has been able to hit .400, despite the fact that today’s baseball players are superior athletes with better training techniques (and better diets). Swedroe suggests the issue is actually that the skill level has risen so much in baseball, there’s less and less difference in the relative skill of the players (even though the absolute level is much higher), and that has made it harder for anyone to outperform their peers by a large margin. In other words, the standard deviation of the group declines, and most deviations from the average (e.g., hot-streaks and cold spells, to the extent there are any) are often attributable to just luck and random chance, with the caveat that those differences average out in the long run (e.g., an entire baseball season). These results are borne out in the baseball data; while the average hitter has maintained a roughly .250-.260 average throughout the decades, the standard deviation of batting averages was 40.6 points in 1921, only 32.5 by 1941 (the last time a .400 hitter was seen), and by 2003 it had fallen to only 26.1 points; in other words, hitting .400 has gone from being a rare 3-standard-deviation event to a virtually impossible 5-standard-deviation one. And this “paradox of skill” effect – that greater absolute skill levels for every leads to a narrower range of results and a reduced likelihood of exceptional stars – is also borne out in basketball, and Swedroe suggests the same phenomenon is at play in asset management as well, which is why we haven’t seen any new Peter Lynches or Warren Buffets for decades now, even though today’s investment professionals have better training, better analytical tools, and faster access to more informaiton than their predecessors. And in fact, empirical data of asset manager results over the past several decades appear to affirm that the standard deviation of manager excess returns is narrowing, as the paradox of skill takes hold, making it harder and harder for any manager to outperform the pack enough to really stand out (or even overcome their fees and expenses).